Business loans can be vital to growing your business. But you want to be careful when shopping for a business loan, as there are plenty of scammers who are out to take advantage of business owners they think might be desperate. As a result, it’s important to know how to check if a loan company is legitimate. Here are some tips to help you spot potential red flags.
Common types of loan scams
There are two common types of loan scams you’ll want to watch out for. (Both personal loan scams and business loan scams often operate in a similar fashion.) They are:
- Advance Fee Loan Scams. Here, loan scammers will promise a loan but will require money upfront to either pay for “insurance” or to make a few payments up front to “demonstrate good faith,” They will typically require these payments to be made with a gift card or prepaid card— either by asking you to mail them the card, or more commonly to read the information from the card to them over the phone.
- Phishing scams. In these scams, someone tries to get you to reveal sensitive information in order to provide you a loan. The loan never materializes but you or your business becomes a victim of identity theft.
Either can be devastating financially. Running a business is stressful enough without falling for a loan scam!
How to spot a loan scam
There are warning signs that you may be dealing with a loan scammer rather than a reputable lender:
Requires an upfront payment. Scammers may insist you send them money before you get the loan funds. In some cases there may be legitimate upfront fees for a loan (such as an appraisal for a commercial mortgage) but in most cases these fees are bogus attempts to steal your money. The scammer will usually require you pay by a method that’s difficult to trace and impossible to refund, such as wire transfers or prepaid cards.
Requests personal information but is not secure. This one is tricky because loan applications with legitimate loan companies often will require you to provide a Social Security Number (SSN) for a personal credit check and/or an Employer Identification Number (EIN) or Taxpayer Identification Number (TIN) for a business credit check. Your bank account number may be required either to verify revenues or to facilitate ACH payments. It is essential that when you are asked to provide personal information make sure you are dealing with a reputable company and using a secure website. (See tips below.)
Loan approval regardless of credit. Scammers will often say you are approved for a loan even though you have a bad credit score and don’t meet normal qualifications. Most lenders will have some basic creditworthiness requirements, whether that’s based on personal and/or business credit. While there are some types of small business financing available to business owners with poor credit, there is often a higher cost associated with these options.
Excellent loan terms for a new or struggling business. Most business loans require a combination of strong revenues, at least 1-2 years in business and/or good credit. If you have none of these qualifications it is unlikely you will qualify for most types of small business financing. If someone calls you and promises financing at very low interest rates regardless of your qualifications, you may be dealing with a scammer.
How to check if a loan company is legitimate
There are several ways to check if a loan company is legitimate. First, check out the loan company on the Better Business Bureau (BBB) website. Do a quick online search and look up customer reviews. Finally, check with your state’s attorney general to make sure that the lender is registered with the proper state government agencies.
Before you apply with a lender, think about these steps to make sure you don’t get caught up in a scam.
1. Check for an online presence
Before you do business with an online lender, do an internet search for the company name. (Tip: Try the “news” tab in google to see if the company has been mentioned in news articles.)
You can also look up the domain name registration to see when a website was registered. This may help you spot a site that is brand new and may have been created for unscrupulous purposes.
Loan brokers and loan companies must be registered in certain states. If they are, they will list that license information on their website. Look for it, and when in doubt, verify it.
Most importantly, before you enter any information on an online lender’s website, check for a padlock in the URL to make sure the site is secure. You can then click on the padlock to see if the security certificate is up to date.
Pro tip: Never enter personal information or sensitive business information on a website that is not secure!
2. Research the business location
Look under the website contact information for a physical address, then look that address up on google maps. You may be surprised how many of these searches result in a residential home address or a business that has nothing to do with lending! If the only address is a P.O Box, make sure you do additional research to verify the company is legitimate. You can also do a reverse search on the phone number calling you.
2. Check with the Better Business Bureau
Even if the loan company has an online presence, that doesn’t necessarily mean that its operations aren’t predatory. Check the Better Business Bureau website to learn more about whether the lender is worth working with. You’ll typically see a letter grade from A+ to F, along with reasons for the grade.
In some cases, you’ll also be able to read customer reviews, which can give you a better idea of what to expect. If you find that the lender wouldn’t be a good fit, you can also use the website to find one that might be a better one.
3. Do a gut check
Lenders want your business, but they shouldn’t be desperate for it. If you feel like the person you’re dealing with is overly aggressive or manipulative, it might be a sign that they’re trying to fluster you and make you feel like you need to make a decision before you get all the facts.
If you feel uncomfortable about the process at any time, take a step back and consider why you feel that way and whether you should continue.
4. Check with the state’s attorney general
If most everything checks out, but you want to be entirely sure, contact your state’s attorney general office or the state attorney general’s office in the state where the business is located. Lenders and loan brokers are often required by law to register with state agencies before they can do business there.
Who is at risk of a loan scam?
The more desperate you are to get financing quickly, the more you will be a target for predatory lenders or scams. You’ll need to be especially careful if you are looking for:
- A debt consolidation loan because you are falling behind,
- A bad credit loan because your credit history is not good,
- A large loan amount with minimal qualifications, or
- A business loan even though you’ve been turned down by multiple lenders.
That doesn’t mean you can’t find a loan but you must be very careful not to get taken in by a scam.
Warning: Watch out for loan offers that are too good to be true!
Other tips to consider:
In addition to taking the above steps, there are some other small things to think about as you learn how to check if a loan company is legitimate. Here are some questions and answers to help:
Do loan companies ask for money up front?
Some lenders charge what’s called an origination fee to process your loan. However, this fee is typically deducted from your loan disbursement. Legitimate lenders don’t ask you to pay the fee directly before you can get access to your money.
Do loan companies check your bank account?
In some cases, a lender might ask for your bank account number to know where to send the loan funds after your application has been approved. Some online lenders may ask you to connect a business bank account to analyze and verify your revenues to see whether you qualify for an online loan. In those cases, make sure you are dealing with a legitimate lender and a secure website.
Watch out for scammers looking to get access to your account to make a withdrawal or transfer to their own account.
How do I spot personal loan fraud?
Some personal lenders will allow you to use personal loan funds to start or fund a business, but there are also plenty of scams to watch out for here. In general, you can use the same steps as you would with a business lender to find out if you are presented with a legitimate personal loan offer.
Are bad credit loans legitimate?
There are several legitimate business lenders who specialize in working with borrowers with bad credit. In most cases, those lenders will base their decision on your verifiable business revenues and will require at least a year in business. Take your time when comparing bad credit business lenders to make sure you not only avoid scams but also improve your chances of getting favorable terms on your loan.
Where can I report a loan scam?
The bottom line
If you’re trying to get capital to grow your business, knowing how to check if a loan company is legitimate can save you from losing money and potentially your business. As you consider these tips and learn where to look to compare legitimate lenders, you’ll be able to get the help you need without being worried about getting taken advantage of.